# Ranking perpetuals by funding rate collects less than costs

> Ranking perpetual futures by funding rate collected 0.75 to 6.20 bp of funding per trade against 9.57 to 16.69 bp of costs; net Sharpe was negative in all 12 cells (-0.73 to -11.59).

E005 · Verdict: KILL · Cause: Below costs · Market: Crypto & DeFi · Mechanism: Risk premium · Horizon: 8h-24h · Tested: October 2026

Source: https://alphanotfound.eu/experiments/E005-funding-rate-ranking-on-perpetuals

A common belief says that perpetual futures with the highest funding rates are crowded with leveraged longs, so shorting them and buying the lowest-funded ones should earn the funding payment plus a price edge. We ranked 24 perpetuals by their last funding rate at every 8-hour settlement, shorted the top group, bought the bottom group and held for 8 or 24 hours. Funding received was 0.75 to 6.20 bp per trade, price moves were noisy around zero (-3.23 to +5.31 bp) and costs were 9.57 to 16.69 bp. Net Sharpe was negative in all 12 cells, from -0.73 to -11.59.

## Key numbers

- **Funding received per trade:** 0.75 to 6.20 bp (across 2 holding periods, 2 group sizes and 3 windows)
- **Costs per trade:** 9.57 to 16.69 bp (7 bp per side on the weight that changes at each entry)
- **Net Sharpe range:** -0.73 to -11.59 (every one of the 12 cells is negative)
- **Best cell, 24h quintile, selection window:** -4.50 bp (6.20 funding + 0.66 price - 11.36 cost, n 1,284)

## The idea being tested

**Belief:** Perpetual futures with the highest funding rates are crowded longs: short them and buy the lowest-funded ones to collect the funding.

**Why people believe it:** Perpetual futures have no expiry, so the exchange keeps their price near spot with a funding payment every 8 hours: when the perpetual trades above spot, longs pay shorts. People argue that a very high rate marks crowded leveraged longs, that the short collects the payment, and that the crowded side is more likely to be unwound than to keep pushing the price against the short.

**Why it would persist:** People argue that leveraged speculation is a standing demand, and that hedging it ties up capital and margin, so not enough capital would close the gap.

## How it was tested

At each funding settlement (00:00, 08:00 and 16:00 UTC) we looked at the last funding rate of each of 24 perpetual futures and sorted them. We shorted the top 20% (or top 33%), bought the bottom 20% (or 33%), weighted the coins equally in each group and held the position for 8 or 24 hours. The result counts the price change, the funding actually paid or received over the hold, and 7 bp per side of trading cost. The history was split into three consecutive windows of 60%, 20% and 20%.

**Pre-registered:** no

**Data:** Hourly candles and historical funding rates of 24 USD-margined perpetual futures on the largest USD-margined crypto perpetual venue (venue public market-data endpoints; 1h candles; funding settled every 8h; 2021-01..2026-10)

**Universe:** 24 liquid USD-margined crypto perpetuals, the same panel used in the other cross-sectional perpetual tests.

**Signal:** At each settlement time t, percentile-rank the last settled funding rate across coins. Short the top group (rank above 1-q), long the bottom group (rank at or below q), q in {0.2, 0.33}; equal weights within each leg, dollar neutral.

**Execution:** Enter at the settlement time at the close of the preceding hourly bar, hold H in {8, 24} hours, non-overlapping entries every H hours. P&L is the price return over the hold plus the funding rates settled during (t, t+H], received by the short and paid by the long. Net Sharpe is annualised with 24 x 365 / H periods per year.

**Costs:** 7 bp per side (5 bp fee + 2 bp slippage), charged on the turnover of weights between consecutive entries.

**Controls:** None. The test reports price and funding components separately for each window.

**Sample split:** Three windows by position in the settlement series, 60% / 20% / 20% (selection, validation, holdout), with 6,421 settlement times at the 8-hour horizon.

**Pass criterion:** Not recorded as a numeric threshold. The verdict was read from the net Sharpe in each window.

**Kill criterion:** Not recorded as a rule. Read after the fact: net Sharpe at or below zero in the windows. All 12 cells were negative.

**Power:** Not computed in advance.

## Result

**Why it was rejected:** In every one of the 12 cells costs exceeded funding plus price pnl, so net Sharpe was negative (-0.73 to -11.59).

**Observations:** 428

**Net mean:** -9.54 bp

**Median:** —

**Worst:** —

- The summary stats (n 428, net mean -9.54 bp) are the holdout cell of the 24-hour, 20% variant, one of 12 cells.
- Funding received per trade was 0.75 to 6.20 bp across the 12 cells. The 24-hour holds collected 1.82 to 6.20 bp and the 8-hour holds 0.75 to 2.30 bp.
- The price component was noisy around zero, from -3.23 to +5.31 bp per trade, and changed sign between windows in 3 of the 4 variants (for example the 8h quintile: -0.20, -3.23 and +0.15 bp; the 24h tercile stayed positive: +0.64, +0.91 and +5.31 bp, but that is below the costs of 9.57 to 16.69 bp per trade, so it was still a net loss).
- Costs were 9.57 to 16.69 bp per trade and rose over time: for the 24-hour quintile 11.36 bp in the selection window, 12.61 bp in validation and 16.69 bp in the holdout.
- Net per trade (price + funding - cost, computed from the table) was -4.50 to -13.29 bp. The best cell, the 24-hour quintile in the selection window, lost 4.50 bp over 1,284 trades.
- Net Sharpe ranged from -0.73 (24h quintile, selection) to -11.59 (8h tercile, holdout). The 8-hour holds were -3.48 to -11.59 and the 24-hour holds -0.73 to -3.09.
- Reference, not a test: the average funding rate since 2021 was about 10 to 14% a year on the major coins, 10.7% for Bitcoin. The 90-settlement rolling Bitcoin rate fell to 3 to 6% a year in 2025-2026 and was negative around 2026-05.
- Delta-neutral carry (short the perpetual, hold the spot coin) was not run. Its entry costs of 7 bp for the perpetual and 12 bp for the spot leg come to 19 bp one way, which is about 12 to 23 days of funding at 6% to 3% a year (computed from the rates above).

### Funding is small next to costs (bp)

Per-trade components of the 24-hour, top-and-bottom-20% variant in each window. Funding received (6.20, 1.84, 3.11 bp) never reaches the cost paid (11.36, 12.61, 16.69 bp), and price pnl adds under 5 bp, so net is negative everywhere.

|   | Funding received | Price pnl | Cost paid | Net |
| --- | --- | --- | --- | --- |
| Selection (n 1,284) | 6.2 | 0.66 | 11.36 | -4.5 |
| Validation (n 428) | 1.84 | -0.4 | 12.61 | -11.16 |
| Holdout (n 428) | 3.11 | 4.04 | 16.69 | -9.54 |

### Net Sharpe is negative in every cell (net Sharpe)

Annualised net Sharpe ratio of each variant in the selection, validation and holdout windows. All 12 bars are below zero, from -0.73 to -11.59; the 24-hour bars are closer to zero than the 8-hour bars.

|   | Selection | Validation | Holdout |
| --- | --- | --- | --- |
| 8h hold, 20% groups | -3.48 | -8.88 | -10.04 |
| 8h hold, 33% groups | -4.53 | -8.61 | -11.59 |
| 24h hold, 20% groups | -0.73 | -2.68 | -3.0 |
| 24h hold, 33% groups | -1.03 | -2.85 | -3.09 |

## Interpretation

**Why it failed (interpretation, not established):** The test does not isolate a cause beyond the arithmetic. Funding is paid on notional three times a day, and an average rate of 10.7% a year is about 2.9 bp a day (computed), so even the top and bottom groups, which collected 1.82 to 6.20 bp over 24 hours, receive 0.6 to 2.1 days of average carry per trade (1.82 / 2.9 and 6.20 / 2.9, computed). The price leg did not offset that: it was positive in some windows and negative in others, with no stable sign. Costs are charged on turnover, so the higher holdout costs may mean the groups changed more between entries; this was not checked.

**Lesson:** A scheduled payment such as funding is worth collecting only if its size per trade exceeds the cost of entering and leaving. Here funding of at most 6.20 bp per trade was below costs of at least 9.57 bp, and the price leg showed no stable sign.

**Scope:** Covers a cross-sectional ranking on the last settled funding rate across 24 liquid perpetuals, with 8-hour and 24-hour holds, taker costs of 7 bp per side and equal weights. It does not cover longer holds, maker execution, single-coin funding timing, other group sizes or venues, or hedged spot-and-perpetual carry, which was not run.

## Reproducibility

**Steps:** 1) Download hourly candles and the settled funding history of 24 liquid USD-margined perpetuals from 2021-01 from the venue's public endpoints. 2) At each settlement time (00:00, 08:00, 16:00 UTC), percentile-rank the last settled funding rate across coins; the top q is the short leg, the bottom q the long leg, q in {0.2, 0.33}, equal weights, dollar neutral. 3) Take the price at the settlement time as the close of the preceding hourly bar; with entries every H in {8, 24} hours, measure the price return to t+H and add the settled funding rates (received by the short, paid by the long). 4) Subtract 7 bp times the turnover of weights between consecutive entries. 5) Split the series 60/20/20 by position and report the mean price, funding and cost components and the annualised net Sharpe in each window.

**Grade:** COMPLETE

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AI-generated research, checked but not peer-reviewed. Historical, experimental research, not investment advice. Dataset Terms of Use: https://alphanotfound.eu/terms